29 November 2023
If you are covering the OECD’s latest Economic Outlook, please find below a comment from Lindsay James, investment strategist at Quilter Investors:
“Today’s economic outlook from the OECD highlights the effect rising interest rates have had on the global economy, and will continue to do so for some time. While the peak of the rate hiking cycle appears to have been reached, the effects are lagging in nature and thus 2024 is going to see economic growth slowdown even further than it has already, and cause developed nations to feel the effects of the weakening environment. In better news, they now believe that a soft landing is the most likely outcome across the developed economies, with recession avoided – although were at pains to emphasise this was far from a certainty.
“The OECD isn’t expecting any rate cuts until late 2024 and for some economies not until 2025. As a result, stimulating economic growth is going to be very challenging, and thus investors need to adapt and look for quality businesses and more tactical opportunities that can still thrive in uncertain times. Indeed, the OECD expects rate cuts to come from emerging market countries first, and this may present opportunities, especially given the bulk of economic growth is going to come from these countries in the next few years.
“There are clearly concerns too around the level of government debt and what is required to take on the energy transition, ageing populations and a growing appetite for defence spending. These are huge issues that are not solved easily and suggests public finances are going to be squeezed for much longer than interest rates remain at this level, with debts across the OECD forecast to rise by 62% of GDP by 2040 based on current policies. These will require fiscal policy to adapt globally, and difficult spending decisions clearly lie ahead.
“For the UK specifically, the economic picture continues to look murky at best and reflects accurately the OECD’s wider feelings on the global economy. Easing inflation will help things but the OECD, like the Bank of England and the Office for Budget Responsibility, don’t see too many green shoots emerging, with inflation likely to remain above the 2% target in the medium term and unemployment rising. While a technical recession may be dodged, it will be hard to convince people that we haven’t experienced one in reality.
“The OECD also gives some options to help loosen the restrictive fiscal backdrop, and although supportive of the measures in the Autumn Statement, it clearly does not think these go far enough. The state pension triple lock is specifically called out as one way to ease the pressure on government spending – reforming it instead to a double lock of average inflation and wage increases. There is a growing problem with the state pension and in its current state can be financially unpredictable and at worst unsustainable in the long run. It’s unfortunate but not unsurprising that this government has not opted to make long term decisions about reforming how the state pension is uprated, particularly given the economic benefits that could be realised with such a change.”
